The Singapore authorities would like to thank the IMF staff for the 2004 Article IV Consultation. The discussions with the staff on various issues pertaining to recent developments and outlook of the Singapore economy, as well as longer-term structural policies were useful and stimulating. The authorities also welcome the three interesting studies contained in the Selected Issues paper, which provided the opportunity to explore topical issues in greater depth. This statement provides an update on the latest economic developments in Singapore and discusses some of the policy issues raised in the Staff Report.
Recent Economic Developments and Outlook
The Singapore economy has rebounded since mid-2003, underpinned by an upturn in demand in key export markets, supportive macroeconomic policies and continued structural reforms, which have strengthened the competitiveness of domestic businesses in international markets. GDP growth reached a four-year high of 8.1 percent in 2004, boosted by double-digit growth in the first half of the year. In the second half, GDP growth slowed to a more moderate pace, with both manufacturing and services sectors recording weaker growth, following above trend rates of expansion earlier in the year.
The strong economic rebound has in turn led to the creation of 66,200 jobs last year. As a result, the unemployment rate fell to 3.7 percent in Q4 2004, down from 4.6 percent as at end-2003. Going forward, Singapore’s GDP is likely to grow at a more modest pace of 3-5 percent in 2005, reflecting expectations of weaker growth in the external economies and the global IT industry.
Domestic inflationary pressures have been on the rise as a result of the strong economic recovery and higher commodity prices. Nevertheless, overall CPI inflation was capped at 1.7 percent in 2004. For 2005, CPI inflation is likely to come in at 1-2 percent, reflecting the pass-through of high commodity prices as well as firming domestic cost pressures.
The government is also pushing on with structural reforms to enhance Singapore’s growth prospects. In particular, Singapore will continue to develop technologically advanced industries and applications such as pharmaticeuticals, biotechnology and nanotechnology, and move up the “quality ladder” to stay competitive in the region. This strategy has already met with success as observed by the staff in its study on Singapore’s export composition. Indeed, there were more than 3,600 high-tech business start-ups in Singapore last year. At least a quarter of them were foreign enterprises from countries in the Asia-Pacific region, attracted by the presence of a diverse pool of international players, the availability of alternative sources of funding, and connectivity to markets within the region and beyond. In addition, Singapore has made considerable progress in developing niche areas in fund management, healthcare, and education.
Monetary and Fiscal Policy
Singapore’s overall macroeconomic policy stance has evolved in line with the economy’s cyclical developments over the past few years. Fiscal and monetary policies were expansionary in 2002 and 2003, to assist businesses and workers who were adversely affected by the economic downturn and facilitate the recovery process. The policy stimulus was gradually withdrawn with the improvement in underlying economic conditions in 2004 and as the output gap turned positive by the middle of the year.
In April 2004, the Monetary Authority of Singapore (MAS) shifted from a neutral to a tighter monetary policy stance in anticipation of rising inflationary pressures amidst a strong cyclical upswing in the economy. The appreciating policy stance of targeting a modest and gradual appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) was subsequently reaffirmed in October.
The MAS is of the view that the appreciating policy stance remains appropriate in anchoring price expectations in the domestic economy, even as economic growth slows to a more moderate pace in 2005. The policy stance will be reviewed in April 2005, taking into account the underlying economic conditions and prospects at that time. Should the outlook change significantly in the interim, the MAS is ready to make the necessary adjustment to the policy stance. Moreover, the flexibility accorded by the exchange rate policy band would, in the first instance, accommodate any unexpected slowdown in economic activity.
The authorities welcome the staff’s endorsement of the initiatives taken to enhance transparency of the policy framework. Since the public release of the Monetary Policy Statement in 2001, the authorities have been disclosing information on the historical movements of the S$NEER and on key parameters of the policy band where this would not compromise the effective management of the exchange rate or cause disruption to the markets. As a result, market participants have a very good understanding of the policy stance.
The fiscal stance will be appropriately neutral, in line with expectations for the economy to grow at its potential in 2005. The government will seek to restore budget balance and ensure fiscal sustainability going forward. The FY2005 Budget will be announced on February 18, 2005, and can be expected to address the three-broad areas of enhancing Singapore’s economic competitiveness, assisting vulnerable groups such as the elderly and unemployed, and assuring fiscal sustainability.
In addressing the needs of the vulnerable segments, the government will adopt measures that target those who are most in need, while ensuring that there is no erosion of the work ethic. The government has announced its intention to provide greater assistance to Singaporeans through top-ups to a newly-established Community Care Fund1 and the existing Medifund2. A new Re-employment Assistance Programme will be launched to help older, less skilled workers through job redesign, job referrals, and skills upgrading. The experience with the former re-employment scheme has been encouraging with some 21,000 mature workers acquiring new jobs during the recent economic downturn.
Financial Sector Issues
Many of the FSSA recommendations have been implemented. With regard to the key policy recommendation for anti-money laundering and combating the financing of terrorism, the MAS would like to point out that Singapore has a continuing programme of Mutual Legal Assistance Treaty (MLAT) negotiations with several countries, with a few of them near completion. In November 2004, Singapore also signed a regional MLAT with seven ASEAN countries. The MAS will address the other recommendations where appropriate.
Corporate Governance and Disclosure
The authorities note that Singapore’s regulatory regime for listed companies is premised on accurate and timely disclosures by issuers, and effective enforcement when laws are breached. In recent years, Singapore’s disclosure, accounting and corporate governance standards have been substantially enhanced and are in line with international best practices. In particular, failure by listed companies to disclose material information on a timely basis has attracted criminal and civil liabilities under the Securities and Futures Act since 2002. Quarterly reporting for larger listed companies (with a market capitalisation above S$75 million) and mandatory compliance with accounting standards, which are aligned with International Accounting Standards, were introduced in 2003. All listed companies must explain deviations from the Code of Corporate Governance in their annual reports.
The authorities recognise that scandals and failures can occur in any financial centre. No amount of regulation or enforcement can guarantee that a company will never deviate from disclosure rules and corporate governance standards. The hallmark of a well-regulated centre is how effectively it responds and deals with such events. In this connection, the China Aviation Oil case is currently being investigated by the relevant authorities. Appropriate enforcement actions will be taken if any laws or regulations are found to have been breached. Once the results of the investigations are clear, the MAS will review the need for any changes to the rules and standards of corporate governance and market conduct.
Central Provident Fund (CPF)
The government is refocusing the CPF as a core retirement scheme, to help ensure that Singaporeans set aside sufficient savings for their retirement years. To improve long-term returns on members’ CPF savings, reduce members’ investment cost and provide simpler choices, the CPF Board explored the possibility of introducing privately-managed pension plans (PPPs) as an option under the CPF Investment Scheme. Following an extensive industry and public consultation last year, the CPF Board will be assessing the framework for PPPs and studying other pension funds to determine the most appropriate model that would serve the majority of CPF members’ needs.
Government-linked Companies (GLCs)
The staff had observed that the performance of Temasek’s companies stood in contrast to the generally held view of unprofitable and inefficient state-controlled enterprises. This attests to the fact that GLCs are operated strictly on a commercial basis and enjoy no favours or guarantees from the government. They are held to the same high levels of corporate governance and regulatory standards as other companies in the private sector. On the issue of divestment, Temasek has consistently made clear its intent to divest stakes in companies that are not of strategic interest to the country. This commitment is evidenced by its divestment of stakes in 36 companies over the last two years.
The authorities would like to reiterate that competition has always been a key tenet of Singapore’s economic strategy, as it leads to greater productivity gains and more efficient resource allocation. To reinforce Singapore’s pro-enterprise and competition policies, the Competition Commission of Singapore was established in January this year following the enactment of the Competition Act.
The Community Care Fund is managed by the community development councils, and is used to fund financial assistance to needy families.
Medifund helps individuals in the low-income group who are unable to pay for their medical care, either by themselves or with the help of their family, despite government subsidies.